R&D leadership in crisis: rebuilding innovation through people

Pharmaceutical Research & Development (R&D)

organizations are in the midst of a leadership crisis.

Shareholders question the sustainability of the billion

dollar blockbuster pharmaceutical model and large

cap pharmaceutical companies question their own

commitment to internal R&D.

rebuilding innovation through people

Global Life Sciences Practice

R&D leadership in crisis

Pharmaceutical Research & Development

(R&D) organizations are in the midst of a

leadership crisis. Shareholders question

the sustainability of the billion dollar

blockbuster pharmaceutical model and

large cap pharmaceutical companies

question their own commitment to

internal R&D. In this research paper, we

explore the thoughts and opinions of 150

senior R&D executives across a range of

global pharmaceutical companies.

Startlingly, sixty percent of executives

would be interested in moving out of

R&D. These executives are inundated with

multiple tasks and are unable to focus on

creating productive innovation cultures. In

an industry where innovation is intimately

linked to value creation, companies with a

de-motivated R&D leadership team are at

greater risk of eroding shareholder value.

Clearly, today’s R&D organizations and

leadership teams are under tremendous

pressure to deliver results, however,

they must also develop a whole new

innovation paradigm, which creates

sustainable shareholder value.

We believe that difficult questions must

be addressed around the current R&D

leadership in place, as well as the profile

of the next generation of leaders required

to successfully drive this change. In this

paper, we will explore these and other

questions:

• HowshouldR&Dsuccessbedefined

beyond the “blockbuster” model?

• Whatarethehallmarksofasuccessful

R&D organization and culture?

Howdowecompare?

• HowdowedeveloptheR&D

leaders of tomorrow?

Executive summary

R&D leadership in crisis rebuilding innovation through people

2 R&D leadership in crisis: rebuilding innovation through people

end of the ‘golden era’ of the pharmaceutical industry, the

drugs launched and marketed during this period were

discovered and developed during the late 1970s and 1980s.

The commercial successes of the late 1990s led to

an intense R&D focus on a few diseases and reduced

investment in new disease areas, leaving this high-risk

activity to academia and biotech companies. Instead,

many companies focused on developing and launching

‘me-too’ products, to keep pace with competitors.

However, a minority did continue to focus on areas of

unmet medical need, which is the trend today. Soon

governments realized they were paying premium prices

for similar new drugs and increased the hurdles for

reimbursement. Consequently, the cost of developing a

new drug today has soared to over US$1bn and for many

companies their new product pipelines have dried-up and

fewer new drugs have been approved by regulators (fig 2).

Drug development is getting tougher and longerDeclining R&D output is due to many factors including

tougher regulatory requirements, increased payer

pressures and difficulties associated with building and

sustaining creative and productive R&D organizations.

Introduction

A business model in transitionOver the next six years the global pharmaceutical industry

expects some US$133bn worth of branded medicines

to be eroded by generic competition in the USA alone.

Companies have explored different avenues to mitigate

this risk with varying degrees of success. Furthermore, the

impact of shrinking public healthcare budgets and falling

product approval rates will lead to further pressures and

a faster adoption of generic brands. It is widely accepted

that the classical pharmaceutical R&D model is under

tremendous pressure and is unable to yield as many

high-value, reimbursable products as it once did. Political,

financial and regulatory changes have all raised the bar

with regards to new product approval and reimbursement.

As a sustainable pharmaceutical model is yet to be defined

let alone operationalized, shareholders continue to

demand more return on their investments.

Pharmaceutical industry performanceAt the beginning of this study, we analysed the

performance of our sample (31 companies) over the last 20

years relative to other sectors (fig 1). The period between

1991 and 2001 marked a significant growth phase and the

figure 1

Change in Enterprise Multiples (TEV / EBITDA) from 1991 to 2011

From the Heidrick & Struggles survey sample, S&P 500 and S&P 500 Healthcare Index.

Source: Capital IQ and Heidrick & Struggles analysis

Heidrick & Struggles 3

figure 2

Phases of the R&D pipeline

Only one of every 10,000 potential medicines investigated makes it through the R&D pipeline and is approved for patient

use by the Food and Drug Administration (FDA). The average time taken to develop a new drug is 15 years and costs more

than US$1bn. Source: PhRMA

1 Mullard, A, Nature Reviews Drug Discovery 10, 82-85 (February 2011)

The drug development process

Graph shows declining product approval despite increasing R&D investment. R&D investment figures only include

company-financed R&D. Source: PhRMA member survey 2011 and Nature Drug Discovery 1


Our findingsWe believe that as the pharmaceutical industry explores

different business models to create shareholder value,

those who continue to focus on R&D innovation need

to ensure they have R&D leadership teams, which are

engaged and coordinated to deal with the complexity

of this new competitive landscape. Although company

strategy is usually set by boards and executive

management teams, the execution of R&D strategy falls

to senior leadership ranks. We believe and wanted to

test whether struggling senior R&D leadership could be

a key correlating factor with declining R&D output and

ultimately shareholder value, as well as a significant barrier

to changing the current paradigm. With this in mind, we

surveyed 150 R&D executives across a range of 31 global

pharmaceutical companies (see fig 3 for a breakdown of the

Heidrick & Struggles R&D survey sample).

R&D investment is increasingWe expected more companies in our survey to have

reduced their R&D investment, following the global

economic crisis. In contrast, 43% of respondents stated

that the global economic crisis had no impact on their

organization’s R&D budget in 2010, while 17% saw an

increase in R&D expenditure (fig 4). This view is also shared

by the US Pharmaceutical Manufacturers Association

(PhRMA) and Burrill & Company, who found that America’s

biopharmaceutical research companies invested a record

US$67.4bn in 2010 in the research and development of

new medicines and vaccines, an increase of US$1.5bn from

2009.2 However, we should acknowledge that a proportion

of these increases may be due to industry consolidation,

and we would not be surprised to see R&D budgets fall in

the near term.

figure 3

Characteristics of companies participating in our survey

The majority of respondents were at the senior vice president to director level, from large cap pharmaceutical

companies with market capitalisations over US$10bn, located in Western Europe and North America.

Number of respondents from total of 150 survey sampled.

2 www.phrma.org/media/releases/rd-investment-us-biopharmaceutical-companies-reached-record-levels-2010

Respondents by global revenue in 2010

Respondents by number of employees

“How much did your company spend on R&D last year?”

“Where are you currently based?”


Furthermore, 50% of our survey respondents foresee an

increase in their organization’s annual R&D expenditure

in the next two years (fig 5). In our opinion, the increase

in R&D expenditure but decline in the number of new

products approved is not sustainable (fig 2). Additionally,

the continued availability of R&D funding is likely to

present a barrier to changing the current R&D innovation

model. Therefore, companies need to address tough

questions in order to rebuild or recreate productive R&D

organizations.

Organizational reasons for project failureBeyond the obvious product candidate safety and

performance issues, the three major reasons for R&D

project failure cited in our survey include a lack of

creativity and innovation, the absence of co-ordination

between R&D and commercial teams, and the shortage of

quality R&D talent (fig 6).

Lack of creativity and innovation

Value creation in the pharmaceutical sector depends

on innovation more than any other industry. However,

in our opinion, the pharmaceutical industry is mature

and the structures, processes and systems in place

prefer incremental over step change and more radical

innovation.3 For example, the industry has focused on

new indications for current molecules as well as making

small incremental improvements to the pharmacodynamic

and pharmacokinetic properties of a few small molecules

to improve dosing regimes and reduce side-effects. The

economic benefits of incremental innovation are clear

and include: protection from competition; sustained

market share; profitability; and dividend payments for

shareholders. However, after most of the benefits of the

blockbuster model have been reaped, we believe the

industry requires leaders who can deal with ambiguity,

anticipate and respond to environmental changes, and

bring greater impact by going beyond incremental

change.

figure 4

The impact of the Global Financial Crisis on 2010 R&D budgets

figure 5

Change expected in annual R&D expenditure in the next 2 years (2010 to 2012)

3 Davila, T, Epstein, MJ, Shelton, R, Making Innovation Work: How to Manage it, Measure it, and Profit from it, (Prentice Hall, July 2005)


“The really successful [R&D] people are slightly anarchistic

and try to forge their own pathways…large cap pharma is

too process-orientated with too much internal control…

this overwhelms individual contribution…”

Former Global Head of R&D

Absence of coordination and collaboration

Alignment and collaboration at the managerial level is

essential to ensure R&D clarity (sharing a mutual goal),

unity (collaborating across work groups), and agility

(adapting quickly to challenges and changes). Unity

between R&D and commercial departments becomes

even more important during an economic crisis or a time

for step changes. For instance, emerging exploratory

business units benefit from the revenue generated by

exploitative units (e.g. mature product business units).

Furthermore, commercial input at a very early stage in the

R&D process is critical to ensure products in development

are reimbursable and that clinical trials are designed to

generate the right data to address future regulatory and

reimbursement hurdles. Senior managers need to be

able to balance their managerial attention adequately in

order to remain flexible and efficient regarding potential

opportunities within and beyond their environment.4

Shortage of quality R&D talent

The industry is demanding a new breed of R&D leader.

For example, scientists who are exceptional ‘drug

hunters’ and physicians who can predict and translate

future reimbursement requirements into early phase II

comparative studies and pivotal trails. These competencies

are hard to find in today’s scientists and physicians.

Reasons for this shortfall include:

• Infrequentorganizationalsupporttodevelopthe

competencies required to create and lead tomorrow’s

R&D business (fig 8).

• DecreasedretentionratesamongstexperiencedR&D

leaders who have demonstrated tangible results

across the whole drug development cycle, resulting in

an absence of future leaders and role models for the

industry. Several of these leaders have migrated to

more entrepreneurial biotech environments.

• Financialpressuretocutcosts.R&Doutsourcing

may reduce costs but if managed inappropriately,

often results in the opposite effect. Thus creating

more complexity and frustration resulting in higher

staff attrition and loss of tacit knowledge from the

organization.

figure 6

Organizational reasons cited for R&D project failure

The graph indicates the number of responses per option, as respondents were allowed to choose more than one option.

4 Schmitt, A, Probst, G, Tushman, M, “M@n@gement in Times of Economic Crisis: Insights Into Organizational Ambidexterity”, M@n@gement, (13, no. 3 (2010): 128-150)


R&D leaders are losing focus R&D leaders are inundated with multiple chores and

do not have enough time to focus on their core task of

developing and motivating creative drug development

teams. The top three frustrations shared by R&D leaders

in our survey include managing outsourcing, the lack of

autonomy to allocate funds and the need to motivate R&D

scientists to remain creative (fig 7).

Outsourcing

The pharma industry is embracing outsourcing with

an eye on increased profitability, however, outsourced

projects can be potentially difficult to manage and a

significant source of frustration. For example, some

medium-sized pharmaceutical businesses outsource

the majority of their toxicology work, whilst this creates

short-term cost savings; it can also create a knowledge

gap within their own R&D organization, the impact of

which some companies are now feeling (fig 7). Adequate

technical competence as well as proper coordination

and management are required to effectively utilize

complicated and long-distance collaborative third-party

relationships.

There are, however, a number of successful external new

product development organizations. One such example

is the Chorus Group, an autonomous division of Lilly

Research Laboratories that started in 2002 as an innovative

R&D pilot by Eli Lilly. Chorus Group was founded with the

intent of transforming the existing drug development

process by designing and implementing a lean approach

to generating clinical proof-of-concept (PoC) data as

quickly and cost-effectively as possible through the

utilization of a more flexible virtual development model.

They deal with the complexity of vendor management

by using a suite of in-house software tools to track the

progress and impact of activities and opinions across

multiple levels of the early stage development process.5

This can result in early go/no-go-decisions, which would

then allow resources to be quickly allocated to higher

potential development candidates.

Allocating funds

Drug development is time-consuming, risky and costly.

Out of 5,000 to 10,000 tested compounds, only 250 enter

preclinical testing, five enter human clinical trials, and

one is approved by the Food and Drug Administration.6 A

new medicine takes an average 10 to 15 years to develop

and a cost of between US$750mn and US$1bn7. Unlike

many other innovation driven industries, successful

pharmaceutical R&D requires a much longer-term

approach, which often leads to multiple challenges and

hurdles over time. Consequently, organizations place

many necessary restrictions on how funds are allocated

in R&D, however, in our survey this created a significant

source of frustration for leaders. Highlighting the need for

companies to trust and empower cross-functional R&D

leadership teams to make financial decisions quickly, and

fundamentally improve the quality of interaction between

R&D, commercial and corporate finance functions.

figure 7

The daily challenges faced by R&D leaders

The graph indicates the number of responses per option, as respondents were allowed to choose more than one option.

5 Bonabeau, E, Bodick, N, Armstrong, RW, ‘A more rational approach to new-product development’, Harvard Business Review, (2008 March, 86(3):96-102, 134) 6 www.phrma.org/news-media/related-resources/key-industry-factsabout-phrma 7 Includes the lost opportunity cost of not having developed another asset


Motivating teams to remain creative

A key frustration shared by many R&D leaders in our

survey is the need to motivate scientists to remain creative

(fig 7). Pay and promotion, whilst essential, are not enough

on their own. Intrinsic rewards are essential, for example:

the elation that comes when a new product is approved

and fair recognition awarded for success, the clarity

people gain when they understand how their contribution

fits into the overall strategy and direction of the larger

innovation organization; and the satisfaction subordinates

feel when they are provided with challenging assignments

and responsibility for an entire process or unit of work.

R&D career development 55% of our sample group felt that their organizations only

occasionally supported them when it came to developing

the competencies required to progress into senior R&D

management positions (fig 8).

We believe this result represents an opportunity for

organizations to reassess their R&D cultures, define which

leadership, behavioral competencies and performance

indicators are required at each level and re-examine the

talent development processes in place to support the

advancement of high-potential and high-performance

individuals.

R&D leaders want to explore career opportunities in

commercial functions (fig 9). Initially, we viewed this as a

worrying trend, signalling that R&D executives perceive

their commercial counterparts to possess key decision

rights and more attractive career prospects. This further

strengthened our view that the current pharmaceutical

R&D people strategy is not supportive and aligned

with the overall corporate strategy. However, one may

argue that R&D leaders want to broaden their impact on

their organizations by acquiring new skills and bridge

the critical gaps between research, development and

commercialisation.

Core leadership and behavioral competencies for leaders

Those who do pursue R&D careers require far more

organizational support in acquiring and developing the

competencies necessary to be successful in this new and

uncertain R&D landscape. In addition to the relevant

discovery, translational and clinical technical skills,

the following leadership and management behavioral

competencies are typically those critical for R&D success:

• External awareness – Recognizes trends and events

outside the organization, and focuses on the financial,

operational and human capital issues that affect

performance.

figure 8

How frequently does your organization support R&D leaders by helping them develop the competencies required to progress into senior R&D management positions?

figure 9

Would you be interested in moving out of R&D and into a commercial role in your organization?


• Customer orientation – Demonstrates knowledge

and insights of internal and external customers and

acts to fulfil their businesses needs and exceed their

expectations.

• Visionary leadership – Creates and communicates

a clear and compelling view for the future of the

research and/or development organization.

• Organizational buy-in – Effectively builds

commitment and excitement, winning support and

resources for R&D initiatives at multiple levels both

inside and outside the organization.

• Relationship building – Forms networks of positive

business relationships that enhance personal and

business success, essential for developing externalized

R&D programmes.

• Delegating and empowering – Shares the

responsibility for decision-making, ensuring the

process is delegated to the lowest and optimal level of

the organization; is “hands-on” when appropriate; and

allows the people who share the responsibility to have

the authority, support and resources they need to be

successful.

• Decisiveness – Makes decisions in a proactive, timely

way, essential when deciding which projects to

promote or terminate.

These core competencies should be regularly reviewed,

aligned with corporate strategies and optimized for

different cultures and positions within R&D

organizations (fig 10).

Internal talent development

Companies need to focus on retaining and developing

their R&D leaders of tomorrow, understanding that the

number of R&D leaders, with the ‘ideal’ competency

profile, is few and far between. An important hallmark

of successful organizations is how they manage their

leadership talent pipeline. Top organizations are adept at

creating a talent strategy that aligns corporate priorities

with stretching career goals and key performance

indicators for their leaders. They create a workplace

that supports the desires, needs and aspirations of their

people and ensures clarity of career path and fairness

of compensation and rewards. To ensure companies are

developing and retaining the right R&D leadership, tough

questions need to be addressed:

• Howsuccessfulhavewebeenatdeveloping

R&D leaders?

• HowdoourR&Dleadershipteamscompare

against the industry?

• WhatdoourR&Dleadersneedtobesuccessful

in our organization today?

• Howwilltheserequirementschangeasour

strategy evolves?

figure 10

An assessment of the core competencies for R&D leaders today and tomorrow

The scale ascends from 0 (low) to 5 (high),

where 3 is equivalent to ‘competitive’

and 5 would be ‘market-leading’.

Source: Heidrick & Struggles research


External talent acquisition

Organizations frequently hire talent externally from

‘successful companies’ with different business and

innovation models in the belief that these individuals

will replicate success in their own organizations. Recent

research indicates that star employees appear to be

heavily dependent on their former firms’ general and

proprietary resources, organizational cultures, networks,

and colleagues.8 However, there are exceptions, such as

‘stars’ that move with their teams and stars who switch

to better firms. Female stars also perform better after

changing jobs than their male counterparts do. Frequently,

this approach works, however, sometimes the cultural

fit between company and candidate is sub-optimal.

Nevertheless, organizations can help mitigate the risk

of senior executive failure by understanding the non-

portable human capital factors that make their employees

successful. Then integrate these insights into appropriate

onboarding or accelerated transition programs to reduce

the time it takes for an executive to adapt emotionally and

intellectually to a new environment.

Therefore, key questions you should consider are:

• Howsuccessfulareweatintegratingnewhires,

ongoing career development and succession

planning?

• Whyareseniorexecutivessuccessful

in our organization?

• Whydosomeseniorexecutivesfail

in our organization?

• Howcanwemitigatetheriskofsenior

executive failure?

ConclusionThere will always be a demand for innovative medicines.

However, the cost of developing a single new drug is

in excess of US$1bn and new product approval rates

are falling. Pharmaceutical R&D organizations are in

the midst of a leadership crisis. Many scientists and

physicians would consider leaving R&D and moving

into commercial functions. Those that do remain are not

always supported to acquire the skills and competencies

required to be successful. Beyond uncertain career

development prospects, R&D leaders are further frustrated

by outsourcing, a lack of autonomy to allocate funds and

the challenges of maintaining a motivated workforce.

Critically, companies that fail to align R&D teams with

colleagues in commercial functions will not succeed in this

new environment.

The interventions required to address many of the

issues raised in this study can only be achieved

through thoughtful cultural change, internal leadership

development and thoughtful external hiring. However,

there are not enough R&D leaders in the industry with

the right blend of skills to drive this level of change.

Companies need to ensure their corporate objectives

are underpinned by a rigorous R&D people strategy

that balances internal development with external hiring

and top team development. Furthermore, a thorough

understanding of the non-portable human capital factors

that enable people to be successful will enable companies

to strengthen the power of their own employer brand

and make the right external hiring choices. Clearly, the

healthcare industry is in a state of flux and the only

constant is the continual need for commercially

astute and visionary R&D leaders to create innovation

cultures capable of delivering long-term sustainable

shareholder value. n

8 Groysberg, B, Chasing Stars: The Myth of Talent and the Portability of Performance, (Princeton University Press, 2010)


The global Life Sciences Practice encompasses medical

devices, diagnostics, pharmaceuticals and biotechnology.

Each of these business sectors is intellectual property-

intensive, with rigorous regulatory and reimbursement

oversight. Our clients operate in dual spheres – science

and business – and we’ve shaped our leadership services

around common challenges facing these segments.

Industry specialists are located in all major markets

worldwide, and possess first-hand knowledge of the

criteria for effective leadership in the life sciences industry:

innovation, a deep understanding of science and the

ability to manage complex projects while maintaining a

competitive edge.

Life Sciences Practice

R&D leadership in crisis: rebuilding

innovation through people

was written by

Dr Niren Thanky, London

in collaboration with:

North America

Robert Atkins, Philadelphia

Cheryl Johnson, Philadelphia

Howard Levine, Philadelphia

Julian McCarthy, New York

EMEA

Dr Marion Fengler-Veith, Zürich

Annabel Parsons, London

Dr Christine Stimpel, Düsseldorf

Caroline Vanovermeire, London

Asia Pacific

Chris Kao, Shanghai

Dr Bill Lin, Shanghai

Charlie Moore, Singapore

Pratap Nambiar, Singapore

Copyright ©2011 Heidrick & Struggles International, Inc.

All rights reserved. Reproduction without permission is prohibited.

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201101PBTSDG66

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R&D leadership in crisis: rebuilding innovation through people